SHANGHAI, Oct 22 (Reuters) - China's yuan inched lower on Tuesday, as corporate demand for dollars outweighed a stronger-than-expected midpoint fixing and signs of progress in the Sino-U.S. trade negotiations.
Corporate clients loaded up on greenbacks in the morning, traders said, but added that they were cautious with their proprietary trading as the official fixing was firmer than the market projection even though the dollar had gained overnight.
Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate CNY=PBOC at 7.0668 per dollar, 12 pips firmer than the previous fix of 7.068 and 40 pips stronger than Reuters' estimate of 7.0708.
In the spot market, onshore yuan CNY=CFXS opened at 7.0720 per dollar and was changing hands at 7.0765 at midday, 15 pips weaker than the previous late session close.
The yuan's short-term movement is "dependent on the Sino-U.S. relationship. If the two countries can reach the phase one trade deal as expected, the yuan could rise to around 7 per dollar level, or probably rise past the 7 mark," said Yan Se, chief economist at Founder Securities in Beijing.
He said he expects the Chinese currency to finish the year in a range between 6.9 and 7.1 per dollar.
U.S. President Donald Trump and Chinese President Xi Jinping are scheduled to attend the summit of the Asia Pacific Economic Cooperation (APEC) countries in Chile next month. Trump has hinted that a written agreement could be signed there.
China's Vice Foreign Minister Le Yucheng said on Tuesday that both China and the United Sates have achieved some progress in the bilateral trade talks.
Some analysts and economists also pointed out that a widening yield gap between the world's two largest economies should provide support for the yuan after the PBOC kept its new lending benchmark, the Loan Prime Rate (LPR), unchanged on Monday, although the initial market reaction was largely muted.
"Yield advantage along with positive news around the Sino-U.S. trade talks should support the yuan in a range of 7.05 to 7.1 per dollar," analysts at OCBC Wing Hang Bank said in a note.
A wider yield gap between China and the United States means less pressure for capital outflows from China.
Yan of Founder Securities said the PBOC's easing bias was unchanged and it could continue to make "marginal downward adjustment" in the LPR. He sees a possibility the central bank will lower reserve requirement ratio (RRR) in December to keep general liquidity ample in the banking system.
The global dollar index .DXY fell to 97.316 at midday from the previous close of 97.328.
The offshore yuan CNH=D3 was trading at 7.074 per dollar as of midday.
The yuan market at 0352 GMT:
PBOC midpoint CNY=SAEC
Spot yuan CNY=CFXS
Divergence from midpoint*
Spot change YTD
Spot change since 2005 revaluation
Thomson Reuters/HKEX CNH index
*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2 percent from official midpoint rate it sets each morning.
OFFSHORE CNH MARKET